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| 1 | |
Katie is the CFO of Baxter International. If she has the best interests of the firm's shareholders in mind, she will maintain the capital structure for the firm which: |
| | A) | minimizes the market value of the firm's debt. |
| | B) | maximizes the market value of the firm. |
| | C) | minimizes the book value of the firm's debt. |
| | D) | maximizes the market value of the firm's debt. |
| | E) | maximizes the book value of the firm's debt. |
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| 2 | |
The president of Cyber Tech wants to restructure the firm for the shareholders benefit. The shareholders will benefit from the restructuring only if the: |
| | A) | debt level of the firm is reduced. |
| | B) | changes increase the firm's annual sales. |
| | C) | changes increase the overall value of the firm. |
| | D) | firm's debt is completely eliminated. |
| | E) | changes increase the contribution margin on all products sold. |
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| 3 | |
The Midnite Express is an all-equity trucking firm which has 1,200 shares of stock outstanding. The stock is valued at $24 a share. The financial manager has decided to borrow $4,000 to fund a one-time dividend distribution of $4,000. It is expected that this action will increase the value of the firm by $800. The value of the firm's equity after the dividend has been paid will be _____ and the payoff to the shareholders' from the restructuring will be _____. |
| | A) | $20,500; $1,750 |
| | B) | $22,500; $0 |
| | C) | $22,500; $950 |
| | D) | $25,600; $800 |
| | E) | $25,600; $3,200 |
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| 4 | |
The president of Capital Unlimited is analyzing two capital structures to determine which structure is best for the firm at this time. The first structure consists of 25,000 shares of stock valued at $36 each. The second structure consists of 12,500 shares of stock valued at $36 each plus $450,000 of debt. The interest rate on the debt is 8 percent and the expected earnings before interest are $88,000. Assume there are no taxes. The firm should select the _____ structure because the break-even earnings before interest are _____. |
| | A) | all equity; $16,000 |
| | B) | all equity; $72,000 |
| | C) | debt and equity; $16,000 |
| | D) | debt and equity; $72,000 |
| | E) | debt and equity; $88,000 |
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| 5 | |
Ziegler Transportation currently has 40,000 shares of stock outstanding. The firm is considering borrowing $800,000 and using the funds to repurchase 15,000 shares of stock. The interest rate on the debt is 8.75 percent and there are no taxes. What is the break-even level of earnings before interest between these two capital structures? |
| | A) | $128,282 |
| | B) | $141,414 |
| | C) | $158,400 |
| | D) | $166,667 |
| | E) | $186,667 |
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| 6 | |
Taylor's Men's Wear is comparing a debt and equity capital structure to an all-equity capital structure. The debt and equity structure consists of 2,400 shares of stock plus $25,000 of debt at an interest rate of 8 percent. How many shares of stock comprise the all-equity option if the break-even level of earnings before interest between these two options is $11,600? Assume there are no taxes. |
| | A) | 2,900 shares |
| | B) | 3,150 shares |
| | C) | 3,333 shares |
| | D) | 3,650 shares |
| | E) | 3,800 shares |
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| 7 | |
Suppose you draw a graph with earnings before interest on the horizontal axis and earnings per share on the vertical axis. Which one of the following is statements is true if you compare a levered firm versus an unlevered firm using this graph? Assume there are no taxes. |
| | A) | The levered firm has a lower vertical intercept than the unlevered firm and the slope of their functions are equal. |
| | B) | The levered firm has a lower vertical intercept and a steeper slope than does the unlevered firm. |
| | C) | The levered firm has a higher vertical intercept and a flatter slope than does the unlevered firm. |
| | D) | The unlevered firm has a higher vertical intercept than the levered firm and the slope of their functions are equal. |
| | E) | The unlevered firm has a lower vertical intercept and a steeper slope than does the levered firm. |
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| 8 | |
Which of the following statements regarding leverage are correct?
I. The ultimate effect of leverage depends on a firm's level of earnings before interest.
II. The risk to the shareholders increases as the amount of leverage employed by a firm increases.
III. Firms with minimal earnings are generally better off being all-equity firms.
IV. The disadvantages of debt increase as the earnings before interest increase. |
| | A) | I and III only |
| | B) | II and IV only |
| | C) | II, III, and IV only |
| | D) | I, II, and III only |
| | E) | I, II, III, and IV |
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| 9 | |
The return on equity (ROE) increases _____ for a(n)_____ firm than for a(n) _____ firm. |
| | A) | faster; levered; unlevered |
| | B) | faster; unlevered; levered |
| | C) | slower; levered; unlevered |
| | D) | slower; unlevered; levered |
| | E) | The ROE increases at the same rate regardless of whether the firm is levered or not. |
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| 10 | |
You are analyzing a levered firm that has no taxes. Below the break-even level of earnings before interest (EBI), increased financial leverage will _____, all else equal. |
| | A) | increase earnings per share (EPS) |
| | B) | decrease EPS |
| | C) | not affect EPS |
| | D) | either increase or decrease EPS, but you cannot predict which |
| | E) | either not affect or increase EPS, but you cannot predict which |
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